CFAS Reviewer

Accounting Standards Council (ASC)

- Service activity
- Provide quantitative information

American Institute of Certified Public Accounting (AICPA)

- Art of recording, classifying, and summarizing

American Accounting Association (AAA)

- Process of identifying, measuring, and communicating

IMPORTANT POINTS:
1. Accounting is about financial information
2. Info is financial in nature
3. Info should be useful in decision making

COMPONENTS OF ACCOUNTING
1. Identifying -> analytical
2. Measuring -> technical
3. Communicating -> formal

1. IDENTIFYING
- Non/recognition of business as accountable events
- Event is accountable/quantifiable if it has an effect on assets, liabilities
and equity
- External/exchange transactions: involves one and another entity
- ex. Purchase of goods from supplier; Loaning money from bank
- Internal transactions: takes place entirely within the entity
- ex. Production; casualty

2. MEASURING
- Assigning of peso amounts
- Measurement Basis:
a. Historical Value
b. Current Value

3. COMMUNICATING
- Preparing and distributing of accounting reports to potential users
1. Recording/journalizing -> systematically maintaining records
 2. Classifying -> sorting transactions into their respective classes
-> posting to ledger
3. Summarizing -> presentation of financial statements

OVERALL OBJECTIVE OF ACCOUNTING

Provide quantitative info in making economic decisions
-> accounting is an info system
-> primary task: supply financial information

ACCOUNTANCY PROFESSION

-> Republic Act No. 9298 - law regulating the practice of accountancy in the
Philippines; Philippines Accountancy Act of 2004

To become a CPA, one must finish a degree in BSA and pass the board exam given by
the Board of Accountancy

Board of Accountancy - body authorized by law to promulgate rules and regulations

affecting the practice of the accounting profession in the Philippines.
- Responsible for preparing and grading the CPA examination
- Body governing accountancy profession
- Supervises registration, licensure, and practice of accountancy in ph
- Issues, suspend, revoke and reinstate the certificate of registration for practice of
accountancy profession

Limitation of the practice of public accounting

1. Single practitioner/partnership -> should be registered CPA in the Philippines
2. Certificate of Accreditation:
a. Shall be issued to CPA in public practice
b. Approved by the Professional Regulation Commission (PRC) that
registrant has required a minimum of 3 years experience in any area of
public practice.

Securities and Exchange Commission (SEC): Regulator of all business

Accreditation to practice of public accountancy

1. CPA, firms and partnerships of CPA including staff are required to register with
BOA and PRC.
 2. PRC upon favorable recommendation of BOA shall:
a. Issue certificates of registration to practice accountancy
b. Valid for 3 years and renewable every 3 yrs upon payment
RATINGS IN CPA LICENSURE:
1. Obtains 75% general average, with no grades of 65% with any subject
2. Conditional credit will be given for subject passed
3. Shall take examination in remaining subjects within 2 years from preceding
examination
4. If fails to obtain at least the gen. Average and rating of at least 26% in each
subject re-examined, then determined fail

4 AREAS OF SPECIALIZATION OF A CPA

1. Public practice
2. Commerce and Industry
3. Academe
4. Government agency

PROFESSIONAL ACCOUNTANT
1. Attributes - systematic theory
-> Public accountancy profession consists of:
a. Accounting theory financial accounting
b. Reporting standards
c. Practices and auditing standards
-> considered as science of validation

2. Scope of practice - Public Accountancy

-> individual practitioners, small accounting firms, large organizations; serves on
contractual basis
-> 3 different kinds of services
a. Auditing
b. Taxation
c. Managerial advisory services

3. Scope of practice - Private Accountancy

-> Accounting staff, internal auditor, controller; only serves one company

4. Scope of practice - Education and Academe

-> Teaching accounting, auditing, law, taxation, etc.

5. Government Accounting
 -> Focus: Custody and administration of public funds

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

- RA 10912 -> law mandating and strengthening the CPD for all regulated
professions
- CPD: acquisition of advanced knowledge, skill, and proficiency.
- enhances the technical skill and competence of CPA

CPD CREDIT UNITS

- All CPA are required to comply with 120 CPD credit units w/ following minimum
required credit:
a. Technical Competence: 30 units
b. Professional skills: 5 units
c. Value, Ethics, attitude: 5 units
- mandatory
- Excess credits shall not be carried over to the next 3 year period, except credit
units earned for masteral/doctoral degree.
- 15 CPD credit units are required for renewal of CPA license

EXEMPTION FROM CPD

- Permanently exempted when reached 65 years old
- Applied to renewal of license

THREE TYPES OF AUDITORS OPINION

1. Unqualified: issued with no reservations regarding the state of audited financial
statement

2. Qualified: issued when there is

a. Scope of limitation
b. An issue discovered
c. Inadequate closure

3. Adverse: also known as “disclaimer”

- Issued when auditor can’t obtain sufficient support for amounts reported in
financial statements to draw conclusions
- cause:
a. Auditor was not able to complete all planned audit procedures
b. Client restricted scope of examination to extent that auditor can’t
form an opinion
ACCOUNTING VS AUDITING
1. Accounting
- Essentially constructive in nature
- Ceases when financial statements are already prepared

2. Auditing
- Analytical
- Begins when work of accountant ends
- After preparation of financial statements, auditing begins
- Auditors examines financial statements to ascertain whether they are in
conformity with GAAP

ACCOUNTING VS BOOKKEEPING
1. Bookkeeping
- Procedural and concerned with development and maintenance of
accounting records
- “How” of accounting

2. Accounting
- Conceptual
- Concerned with “Why”; justification for any action adopted

FINANCIAL ACCOUNTING VS MANAGERIAL ACCOUNTING

1. Financial accounting
- Concerned with recording of business transactions and preparations of
financial statements
- Focus on general purpose financial statements intended for internal and
external users
- Emphasizes reporting to creditors and investors

2. Managerial accounting
- Accumulation and preparation of financial reports to internal users only
- Emphasizes development of accounting information for use within an
entity

Generally Accepted Accounting Principles (GAAP)

- Represents the rules, procedures, practice and standards followed in the
presentation and preparation of financial statements.
- Must be followed in Financial Reporting
 - A political process which incorporates political actions of various intended users
as well as professional judgment, logic and research.

Purpose of Accounting Standards

- To identify proper accounting practices for the preparation and presentation of
financial statements.
- Creates a common understanding between preparers and users of financial
statements based on the same financial information.

Financial Reporting Standard Council (FRSC)

- Established GAAP followed in PH
- The development of GAAP is formalized initially through the creation of the
Accounting Standards Council (ASC)
- FRSC now replaces the ASC
- The accounting standard setting body was created by the Professional
Regulation Commission upon recommendation of the Board of Accountancy
(BOA) to assist BOA in carrying out its powers and functions provided under RA.
9298.
- To establish and improve accounting standards that will be generally accepted in
the Philippines.
- Constitute the highest hierarchy of GAAP in the Philippines
- The approved statements of the FRSC are:
a. Philippine Accounting Standards (PAS)
b. Philippines Financial Reporting Standards (PFRS) -> monitors technical
activities of IASB and adopt standards they develop
- Composition:
a. 15 members; 1 chairperson, 14 representatives
b. 3 years term
c. Members should not be disqualified from being appointed to FRSC

PHILIPPINE INTERPRETATIONS COMMITTEE (PIC): prepare interpretations of of

PFRS for approval by FRSC; also provides timely guidance on financial reporting issues

INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)

- IASC: independent private sector body
- Objective:
a. achieve uniformity in accounting principles for financial reporting
b. To promote worldwide acceptance and observance
c. To formulate and publish accounting standards to be observed in
presentation of financial statements
 - Formed in June 1973 through agreement made by Professional Accountancy
Bodies

INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

- Replaces IASC
- Publishes standards in series call International Financial Reporting Standards
(IFRS)
- Adopted body of standards issued by IASC
- Takes account of the needs of range of size and type of entity in diverse
economic setting

3 FINANCIAL REPORTING FRAMEWORKS

1. Full PFRS
2. PFRS for SMEs
3. PFRS for Small entities

TYPES OF BUSINESS ACCORDING TO ASSET

1. Small Entity (SE)
- P3M to P100M assets/liabilities

2. Small and Medium size entity (SME)

- P100M to P350M Assets
- P100M to P250M Liabilities

3. Large Corporations
- More than P350M assets
- More than P250M liabilities
- Has public accountability
- Shares and debt instruments are traded in stock enterprises

GENERAL PURPOSE FINANCIAL STATEMENT (GPFS)

- Directed towards common info needs of wide users who are not in position to
demand for reports tailored to their particular needs

USERS OF THE FINANCIAL STATEMENTS

1. Internal
a. Management
b. Employees
c. Shareholders
2. External
 a. Potential Investors
b. Lenders
c. Suppliers
d. Customers
e. Government
f. Public

FINANCIAL RATIO: Reflects how effective and efficient employees have performed
LIQUIDITY: How quickly resources be converted into cash; availability of cash in the
near future

CONCEPTUAL FRAMEWORK: Objectives of financial reporting

Conceptual Framework: describes the concept of GPFR
- Provide overall theoretical foundation for accounting
a. Contribute to transparency
b. Strengthen accountability
c. Contribute to economic efficiency

Specific Objectives of financial reporting

a. To provide information useful in making decisions about providing resources to
the entity
b. To provide information useful in assessing the cash flow prospects of the entity

Financial Position: information about the entity’s economic resources; assets,

liabilities, and equity

Solvency: availability of cash over a long term

Accrual Accounting:
- Financial performance must be measure in accrual accounting basis
- Accrual basis: effects of transactions are recognized when they occur and not as
cash received/ paid

CONCEPTUAL FRAMEWORK: Qualitative Characteristics

-> Are the qualities of attributes that make financial accounting information useful to the
users.

Fundamental Characteristics
- Relevant to financial statement
- Qualities the financial statements must have
 1. Relevance
- The capacity of the information to influence a decision.
- Requires that the financial information should be related or pertinent to the
economic decision.
- Also used to confirm (or change) users’ past conclusions about an entity’s
financial performance.
- Predictive Value: If it can be used as an input to processes employed by
users to predict future outcome.
- Confirmatory Value: If it provides feedback about previous evaluations.

2. Faithful Representation
- Must faithfully represent the economic events that it purports to represent.
- Other term: Reliability
- Completeness: Requires that relevant information should be presented in
a way that facilitates understanding and avoids erroneous implications
- Neutrality: Without bias in the preparation or presentation of financial
information. Free from Bias.
- Freedom from error: No errors or omissions

Enhanced Characteristics
- To increase the usefulness of the financial information that is relevant and
faithfully represented.

1. Comparability
- The ability to bring together for the purpose of noting points of likeness
and difference.

2. Understandability
- Classifying, characterizing, and presenting information clearly and
concisely makes it understandable.
- Requires that financial information must be comprehensible or intelligible if
it is to be most useful.

3. Verifiability
- Helps assure users that information faithfully represents the economic
phenomena it purports to represent.
- Different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular
depiction is a faithful representation.
 4. Timeliness
- Having information available to decision-makers in time to be capable of
influencing their decisions.
- Generally, the older the information, the less useful it is

Materiality - An item is material if knowledge of it could reasonably affect or influence

the economic decision of the primary users of the financial statements.
- What is material for one entity may be immaterial for another.

Conservatism - Recognising expected losses immediately, but deferring expected

gains.
- When alternatives exist, the alternative which has the least effect on equity
should be chosen.
- “ In case of doubt, record any loss and do not record any gain.”

Underlying Assumptions

->Are the basic fundamental premises on which the accounting process is based
->Serves as the foundation or bedrock of accounting in order to avoid misunderstanding
but rather enhance the understanding and usefulness of the financial statements.
-> Basis of consistency

Going Concern - The absence of evidence to the contrary, the accounting entity is
viewed as continuing in operation indefinitely.
- Normally prepared on the assumption that the entity will continue in operations
for the foreseeable future.

Accounting Entity - Separates the company and the transaction of the owner
- Transactions of the said individuals must not be included as transactions of
business.

Accrual Basis - Income/Expenses are recorded when they’re billed/earned regardless

of when the money is actually received.

Time Period - Requires that the indefinite life of an entity is subdivided into accounting
periods which are usually of equal length for the purpose of preparing final reports.
- Financial reports are to be prepared for one year or a period of twelve months.
 - A calendar year is a 12 month period that ends on December 31
- A natural business year is a 12 month period that ends on any month when the
business is at the lowest or experiencing slack season.

Monetary Unit - Records monetary value

1. Quantifiability - the elements should be stated in terms of a unit of measure
which is the peso in the Philippines.
- Should be stated under one unit of measure.

2. Stability of the peso - purchasing power of the peso is stable or constant and that
its instability is insignificant and therefore may be ignored.

Recognition and Measurement

Recognition - The process of capturing for inclusion in the financial statements an item
that meets the definition of the elements.

Point of sale income recognition - The basic principle of income recognition is that
income shall be recognized when earned.

Expense recognition - Expenses are recognized when incurred.

- The matching principle has three applications, namely:
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition

An expense is recognized immediately:

a. When an expenditure produces no future economic benefit.
b. When cost incurred does not qualify or ceases to qualify for recognition as an
asset.

Derecognition - removal of all or part of a recognized asset or liability from the

statement of financial position.
- Normally occurs when an item no longer meets the definition of an asset or a
liability.

Measurement - defined as quantifying in monetary terms the elements in the fin. State.
Historical Cost - incurred in acquiring or creating the asset comprising the
consideration paid plus transaction cost.

Current Value
1. Fair Value - price that would be received to sell an asset in an orderly transaction
between market participants at measurement.
- Is an exit price or exit value

2. Value in use - present value of the cash flows than an entity expects to derive
from the use of an asset and from the ultimate disposal.
- Does not include transaction cost on acquiring the asset but includes
transaction cost on the disposal of the asset.

3. Fulfillment Value - present value of cash that an entity expects to transfer in

paying or settling a liability

4. Current Cost - Cost of an equivalent asset at the measurement date comprising

the consideration paid and transaction cost.

Presentation and Disclosure - can be effective communication tool about the

information in financial statement

Classification - the sorting of elements on the basis of shared or similar characteristics.

Aggregation - adding together of the elements that have similar or share

characteristics and are included in the same classification.

Capital Maintenance

-> The financial performance of an entity is determined using two approaches, namely
transaction approach and capital maintenance approach.

Financial Capital - Monetary amount of the net assets contributed by shareholders and
the amount of the increase in net assets resulting from earnings retained by the entity.

Physical Capital - Quantitative measure of the physical productive capacity to produce

goods and services.

Elements of Financial Statements

-> The building blocks from which financial statements are constructed
-> Measurement of Financial Position:
1. Asset ( A = L + E )
2. Liability
3. Equity
-> Measurement of Financial Performance:
1. Income
2. Expense

Asset - A result of past events and from which future economic benefit are expected to
flow to the enterprise

Liability - Present Obligation of an entity to transfer an economic resource as a result of

past events

Equity - A residual interest in the assets of the entity after deducting all of the liabilities.

Income - Increases in assets or decreases in liabilities that result in increases in equity.

- Revenue - arises in the course of ordinary regular activities and is referred to by
a variety of different names including sales, fees, interest, dividends, royalties
and rent.
- Gain - represent other items that meet the definition of Income and do not arise
in the course of ordinary regular activities.

Expenses - decreases in assets, increases in liabilities that result in a – in equity.

PRESENTATION OF FINANCIAL STATEMENTS

Financial Statement: structured financial presentation of financial positions and

performance of an entity

Complete set of financial statements:

1. Statement of financial position/Balance Sheet
2. Statement of financial performance/Income statement
3. Statement of changes in equity
4. Statement of comprehensive income
5. Statement of cash flows
6. Notes
General Features:
1. Explicit and unreserved statement of it compliance w/ PFRS
2. When entity departs from requirement, shall disclose:
a. Presented fairly position, performance, and cash flow
b. Complied with standard
c. Nature of departure
d. Reason why
3. Present at least annually
4. Consistency
5. Shall disclose comparative info
6. Present separately each material class of similar items

STATEMENT OF FINANCIAL POSITION

-> Assets, Liabilities, and Equity

-> Also known as the Balance Sheet
-> Shows the overall financial position of a company at a specific point in time
-> Contains permanent accounts

Permanent Accounts - Shows the ongoing business progress

Nominal Accounts - temporary accounts which are found in the Income Statement
whose balances are not carried forward to the next period,

Step 1: Recognition Process

1. Assets - present economic resources
- Controlled by the entity
- A result of past events
- Has potential to produce economic benefits

2. Liabilities - present obligations, unavoidable duty or responsibility to fulfill

- To transfer economic benefits
- A result of past events

Classification of Assets
1. Current Assets
a. Asset is cash/cash equivalent unless asset is restricted to settle a liability
for more than 12 months after reporting period
 b. Assets holds asset primarily for the purpose of trading
c. Expects to realize/sell/consume assets within normal operating cycle
- examples:
a. Cash/Cash equivalents
b. Receivables
c. Inventories
d. Prepaid Expense

2. Non Current
- Long term
- Examples:
a. Long term investments
b. Land
c. Building
d. Equipment
e. Accumulated depreciation
f. intangible

Classification of Liabilities
1. Current
- Expects to settle within normal operating cycle
- holds primarily for the purpose of trading
- Due to be settled within 12 months after reporting period
- Does not have the right to defer settlement
- Examples:
a. Trade and other payables
b. Short term borrowings
c. Tax liabilities
2. Non Current
- Examples
a. Long term Notes, bonds, mortgage payables
b. Deferred Tax liabilities

Equity
1. Owner’s equity in sole proprietorship
2. Partner’s equity in partnership
3. Stockholders equity/ Common Stock
- Example:
a. Common Stock
b. Service Revenue
 c. Rent Income
d. Sales
e. Professional Fees

Presentation of the Income Statement

-> In its basic form, it shows the profitability of a company for a particular period.
-> Time period should be indicated (For the yr/month ended)
-> Presents revenue and expense; shows profitability
-> Two forms are allowed:
a. Single Statement - requires that the Total Comprehensive Income is a single
statement wherein all the income and expenses are recognized.
b. The 2 Statement - contains income statement and statement of comprehensive
income.

Also known as:

- Statement of Comprehensive Income
- Statement of Profit and Loss
- Statement of Revenue and Expense
- Statement of Financial Performance

Step 1: Revenue Recognition

- Recognized for every consideration received in the course of the ordinary
business activities regardless of when the payment is received

Step 2: Measurement of Revenue

- Measured at the fair value of the consideration received or receivable
- Take into account contractually defined terms of payment and excluding taxes

How do we recognize expenses?

- Gives rise to outflow of company assets
- Depletion of assets are also recognized as expenses
- Are reflected in the Income Statement in order to conceive the financial
performance of the company

Extraordinary Items - abnormal gains or losses that are not generated in ordinary
business operations.
- Infrequent in nature and unlikely to recur in the foreseeable future.
 Statement of Changes in Equity

-> Also referred as Statement of Retained Earning

-> Shows changes between the beginning and closing balances of the shareholder’s
equity

Methods of Reporting Operating Activities

1. Indirect Method - The profit and loss is adjusted for the effects on non-cash
transaction, any deferrals or accruals of past or future cash receipts, or payments
included in the income statement

2. Direct Method -mejor classes of gross cash receipts and payments are disclosed.
This information is obtained from the accounting records of the entity, adjusting
sales, cost of sales and other items in the income statement.

STATEMENT OF CASH FLOWS

-> a component of financial statement summarizing the operating, investing and

financing activities of an entity
-> provides users of financial statements with all the cash flows that a company receives
from its operation and external sources in a given period

Cash - Comprises cash on hand and demand deposits

Cash Equivalent - Short term, about three months or less; highly liquid investments
that are readily convertible to known amount of cash

3 Classifications of Cash Flow

1. Operating - Indicates the amount of money a company brings in from its ongoing,
regular business activity, such as manufacturing and selling goods or providing a
service
2. Investing - shows the cash generated or spend relating to investment activities
- Includes purchases of physical assets, investments in securities, or sale of
assets/securities
3. Financing - shows the new flows of cash that are used to fund the company
- Includes transactions involving debt, equity, and dividends

2 Methods of Reporting Operating Activities

1. Indirect
 - The profit and loss is adjusted for the effects on non-cash transactions.

2. Direct
- The major classes of gross cash receipts and payments are disclosed
- Obtained from accounting records of entities, adjusting sales, cost of
sales, etc.

Investing Cash Flows

- Includes the following:
a. Cash flow for acquisition and disposal of long-term assets
b. Any gains or loss realized from sale of PPE

Interest
- Interest paid and received shall be classified as operating cash flows because
they enter determination of net income loss
- alternatively:
a. Interest paid may be classified as financing cash flow
b. Interest received may be classified as investing cash flow

Dividends
- Dividends received shall be classified as operating cash flow because it enters
determination of net income
- alternatively:
a. Classified as investing, because it is a return on investment
b. classified as financing because it is cost of obtaining financial resources

Income Taxes
- Cash flows arising from income taxes shall be separ ately disclosed as
operating cash flows.

Notes to the Financial Statements

-> A separate sheet known as the notes to the financial statement

-> Shall present information on the entity relating to the following:
1. Basis of preparation
2. Measurement and specific accounting policies
3. Judgements, key assumptions concerning the future
4. Key sources of estimation uncertainty at the reporting date
 5. Other policies and disclosures that are relevant
6. Shall cross-reference each item in the financial statement to any related
information in the notes.

Inventories

-> A type of asset

-> Most important asset and the largest in number among the current assets
-> Held for sale in the ordinary course of business
-> Or in process of product for sale
-> Or may be in the form of materials or supplies to be consumed in:
a. The production process
b. Rendering of service

2 Types of Business according to product offered

1. Sale of Service
2. Sale of Goods
a. Merchandising - Inventories purchased are ready for sale
- Retail, wholesale
b. Manufacturing - Produce goods to be sold to merchandising firms
- Raw materials, work in process, finished goods

Cost of Inventories for Merchandising Company

- Also known as Lower of Cost or market value
- Estimated selling price less cost to complete and sell
- Uses only one inventory account known as “Merchandising Inventory”

Cost of Inventories for a Manufacturing Company

- Normally uses 3 inventory accounts
a. Raw materials - basic material used from which a certain product is made
b. Work in process - material which the manufacturing process has started
by applying labor and a couple of overhead costs
c. Finished goods - completed and unsold units on hand at the end of the
period

Overhead Costs - expenses applied on the products produced but are not directly
identifiable in the finished goods.

Methods to monitor inventories on hand

 1. Periodic System
- Number of inventory on hand is determined periodically
- All acquisitions of inventory are recorded by debit to “Purchases” account.
- Formula: Purchases - Cost of Goods sold

2. Perpetual System
- Record are maintained perpetually
- All acquisitions of inventory and issuance for sales are recorded to
“Inventory” account as they occur

Inventories Include
1. All cost of purchases
2. Conversion Cost (Direct Labor and Overhead)
3. Other costs incurred in bringing the inventory to their present location and
condition (Shipping cost and Cost to further process)

Property, Plant, and Equipment

-> tangible assets

-> are held for use in production or supply of goods or services, for rental to others, or
for administrative purposes
-> are expected to be used during more than one period.

Examples of PPE:
1. Land
2. Land improvements
3. Building
4. Machinery
5. Ship/Aircraft
6. Furniture and Fixtures
7. Tools

Initial Measurement - Shall be measure at cost

Cost - the amount of cash or cash equivalents paid and the fair value of the other
consideration given to acquire an asset at the time of acquisition or construction.

Directly attributable costs

a. Cost of site preparation
 b. Initial delivery and handling cost
c. Installation and assembly cost
d. Professional fee
e. Costs of testing whether the asset is functioning properly

Subsequent measurement - after initial recognition, shall choose either the cost or the
revaluation model as the accounting policy for PPE

Cost Model - That PPE are carried at cost less any accumulated depreciation and any
accumulated impairment loss

Revaluation Model - That PPE are carried at revalued carrying amount

Government Grant

-> Assistance by the government in the form of transfer of resources to an entity in

return for part or future compliance with certain conditions relating to the operating
activities of the entity.

Recognition
a. The entity will comply with the conditions of the grant
b. The grant will be received.

Presentation of Government Grant

- Government grant related to asset shall be presented in the statement of
financial position in either of two ways:
a. By setting the grant as deferred income
b. By deducting the grant in arriving at the carrying amount of the asset

- Government grant related to income:

a. The grant is presented in the income statement, either separately or under
the general heading "other income"
b. Alternatively, the grant is deducted from the related expense.